Fitch: US Student Loan Default Decline Likely to Continue

The improvement in The Federal Family Education Loan Program (FFELP) default rate is positive for FFELP student loan ABS, Fitch Ratings says. We anticipated this slight decline given the moderate macroeconomic improvement since the peak of the crisis, particularly on the labor market front. We believe part of the improvement is also attributable to a more aggressive push by the government to enroll borrowers in various income-based repayment plans. We expect both of these factors to continue to push the default rate lower in the near term.

The three-year cohort default rate, which includes both FFELP and the Federal Direct Loan Program, declined from 14.7% last year to 13.7% this year. This was the first drop in defaults since the crisis. We anticipated this decline as the 90+ day delinquency rate for student loans delinquencies published by New York Federal Reserve Bank has dropped since the third quarter of 2013. We believe this trend supports future reductions in defaults.

These results are higher than those in FFELP ABS trusts. The default rates for FFELP that went to securitization were typically much lower.

In our view, improvement in the job market is a major driver for the decline in defaults. According to U.S. Federal Reserve data, the unemployment rate for college graduates with bachelor's degrees or higher who are also 25 or older peaked in July of 2009. It began a steady decline in 2010. In addition, the servicers have increasingly responded to the administration's push for various income-based repayment plans. Several plans, including the Income-Based Repayment Plan, Pay as Your Earn Repayment Plan, and Income Contingent Repayment Plan are available for borrowers to choose if they experience financial difficulties.

Additional information is available on www.fitchratings.com.

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